"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Tuesday, June 11, 2013

Lack of Conviction - More Volatility Ahead

Investors/Traders are growing more confused and uncertain as to market direction and many are heading to the sidelines or scaling back the size of their positions in this very difficult trading environment. Witness the type of wild moves we are getting in the currency markets, especially the Japanese Yen, and you are seeing these CARRY TRADES involving the Yen being unwound.

When traders place these highly leveraged bets, they expect LOW VOLATILITY in the carry currency. When that does not occur, but rather the opposite takes place, it wreaks havoc on their positions and they have no choice but to liquidate or reduce market exposure at the very least. The results are unpredictable price movements across a host of markets and extremely wide trading ranges as so many of these hedge funds are all on the same side in the markets they are trading that there is hardly anyone to take the other side as they exit.

The Nikkei is now down 18% from its year-to-date high as the continued strength in the Yen is the carry trade being unwound. AS a matter of fact, the Yen had its single biggest daily gain against the US Dollar in over THREE YEARS! Tell me that the Central Banks have not fed and fostered and nourished this insanely leveraged speculative mania that we have been seeing in equities. It is ALL one massive bubble whose fortunes are tied exclusively to the continuation of enormous Central Bank bond buying policies.

The problem in Japan is that investors there are losing confidence in the ability of the Abe government and the Bank of Japan to actually accomplish what they have promised to do. In other words, the aura of invincibility of the Central Banks is beginning to wane.

Silver is getting whacked extremely hard as it has not been able to recapture most critical support at the $22 level. Failure to get back above there almost immediately is going to send it down to retest the $20 level. It was getting a bit of help from copper but now that copper is swooning after temporarily moving higher on supply disruption fears, that leg of support for the grey metal has been cut off.

Gold is flirting with support near the $1365 level with bears eyeing those stops that are building just below that level. If the physical markets blink and do not quickly step up their pace of gold buying, it too looks vulnerable to further downside. I fear that if bears are able to reach those stops and set them off, a cascade of selling will catch the lower-down stops and take this market all the way back to $1340.

I have said it many times of late and will say so again - Gold must have a catalyst of some sort to reverse the downtrend and give traders a reason to chase prices higher. They are looking to sell rallies, not buy dips. The only reason for any buying in this pit right now is due to strong physical off-take. If that fades...

The HUI continues to act as a drag on the metal. That overhead gap noted on the chart is like a THE WALL in GAME OF THRONES. It must be breached if the night walkers are going to invade the realm of men. Translation - until that gap is closed, the HUI is going nowhere. There simply is no reason for the bears to cover and thus no reason for the bulls to chase prices higher either.

A bit of parting advice for TRADERS out there... be very careful - watch your position size does not get too large for your account right now, especially if you are trading currencies, and forget all the glorious predictions and COT analysis and other claptrap. Right now, none of it means anything. All the matters is money flows and carry trades. If you happen to get caught on the wrong side of this, your career as a trader is going to be rather fleeting.

Investors with a longer time horizon obviously have a different perspective on things because we all know where this is going to go.